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Annals of Capitalism: The Spiral of Evolution

Although Karl Marx has been completely discredited even in the eyes of hard-core liberals, there are some people—including members of the current U.S. administration—who use this current state of economic crises to embrace and actively promulgate some of his socialist ideas. Although those people recognize the serious perils of socialism, they believe that capitalism has not worked well lately either, and that government involvement is necessary to alleviate what they perceive as deficiencies in the free enterprise system.

Their proposed solution is a mix of some capitalist principles with government regulations to prevent crises and recessions and to ensure more adequate distribution of wealth.

Herein we will examine the arguments and look into the source of economic crises.

First, what do we mean by “lately”? Are we talking about the last 2 years, 20 years, or 200 years? Capitalism is an economic system in permanent evolution. Over the centuries it has evolved from slavery and the breakup of feudalism, which continued for thousands of years, into a private enterprise system that created more wealth during the last 200 years than was created over the preceding 7000 years of human civilization. That would suggest that it has, overall, worked pretty well.

Any major shift in productivity and the subsequent creation of wealth has been associated with capitalism. Capitalism was the driving force behind the Industrial Revolution, telephone communications, computers, commercial Internet, nuclear energy, and many more breakthroughs. Capitalism created the economy of mass production, mass productivity, and the society of mass consumption that has evolved into what we call the people’s capitalism—the ownership of means of production by the people. If not for capitalism we would still be riding in carriages, sailing oceans in wooden ships, and using an abacus.

On every step along the development path of capitalism we have seen evolution of the relationship between labor and capital. The labor-intensive enterprises of the industrial revolution required huge labor resources that the cities of European countries could not supply until thousands of illiterate peasants migrated to the cities. Seeking opportunity, they were willing accept any working conditions in exchange for what they saw as a secure income. This created a new class of labor that Karl Marx called the lumpen-proletarians, and said they had “nothing to lose but their chains.”

These 200 years of economic expansion have been characterized by an enormous rise in productivity and wealth. The economy of mass production and mass productivity was born. This period was marked by a concentration of wealth among the upper economic echelon of the society-capitalists, the owners of means of production. This period was also characterized by ruthless exploitation of workers: 12-hour work days, no health insurance, no safety regulations, no vacation. The concentration of wealth at the top and miserable living conditions at the bottom inevitably led to a conflict. Mass production requires mass consumption to maintain balance, but when commerce began producing more goods than could be consumed, economic crisis inevitably followed.

Over the time the masses (lumpen) of proletarians got organized in labor unions. The unions’ contribution to the improvement of working conditions, to further increasing productivity, and to helping create more financial security among the working people cannot be overstated. The continued increase of wealth elevated the lumpen-proletarians into bourgeoisies who had properties and means of production—and had a lot to lose.

It is important to point out that all those transformations of society have been taking place without government mandates, involvement, or even encouragement.

Unlike planned socialist economies that are based on underproduction and inventory control to ensure constant demand for goods and services regardless of quality and price, the free market capitalist economy is unregulated and based on overproduction, which creates competition operating on the underlying assumption that products and services of the best quality and lowest cost will outperform those of lesser quality or higher cost.

Regardless of what triggers a recession, the underlying fundamental is overproduction, the result of excess inventories and excess capacity. Until the excess of inventories is worked out and excess of capacity is eliminated, the recession will continue.

If inventory cannot be sold in a reasonable period of time, production has to slow down and the labor force must be cut to reduce the output. Reduction in the labor force results in diminishing purchasing power of the consumers. The cycle feeds itself: diminished purchasing power of the consumers leads to further cuts in the economy output, which leads to further reductions in labor force, which leads to still further diminished purchasing power and thus to an additional reduction in consumption…and so on, until available capacity and production are balanced with demand. This vicious circle will continue until the excess of inventory is sufficiently reduced to create a new demand. Then the new cycle kicks in: produce, employ, prosper, and overproduce until next crisis.

During an economic crisis weak enterprises perish, the strong get stronger, and new businesses and industries are born offering new goods and services. Though painful, economic crisis serves as a self-cleansing mechanism to get rid of fat, making enterprises leaner and more productive.

Anything alive, including the private enterprise system, can fall ill from time to time; yet in the process of recovery can transform itself into more vibrant and more productive system by eliminating waste and improving its business model. During the recovery it develops immunity against a particular bacterium and gets stronger, and gains more strength with each new “bug” it fights off.

As long as the capitalist system is alive it will go from crisis to crisis, constantly improving itself and constantly increasing wealth and prosperity for all.

As we stated earlier, the most essential source of upward mobility for millions of workers is an inherent conflict between labor and capital (the owners). The constant source of conflict is the struggle for a greater share of profits generated by the rise in productivity. The relationship has evolved from employment-at-will to partnerships, from proletarians without means of production to employees having a stake in enterprises-but the conflict is always there. The conflict exacerbates during a downturn and should be addressed to continue the spiral of evolution. The current economic crisis is no exception.

The labor unions are a prime example of the constant transformation of our economic system and the roots of the current economic crises. In this instance, the labor unions that have contributed enormously to shaping the capitalist economic system, ending exploitation of children, protecting workers from industrial hazards, improving productivity, and raising wages eventually priced themselves out of the market and became an impediment to progress and to further improvements in productivity. When the labor unions exhausted their usefulness they became a drag on the economy, bankrupting our cities, states, and industries. The teachers’ unions prevent meaningful educational reform, contaminating the American labor pool with illiterates. The manufacturers’ unions demand wages and benefits that make American products uncompetitive with non-union foreign enterprises, which forces U.S. companies, committed to minimizing risks and maximizing profits, to move offshore to produce goods, which causes further declines in U.S. manufacturing jobs.

The government regulations may also contribute to downturns as well. Although one can make a case that some government regulations are useful, such as those covering product safety, child labor, and minimally acceptable working conditions, too many regulations regulate past abuses already addressed by capitalism through crises. Businesses are not likely to repeat them again, so now the laws only increase the cost of production, making the products less competitive.

During recessions, small businesses are inevitably hailed as the key to recovery and showered with still more targeted programs. The role of small business in the overall economy and employment is widely misunderstood. Although statistically small business creates most of the jobs during a recovery, it is big business that moves a big economy. Only when big business starts increasing capacities, building new facilities, and begins subcontracting jobs to small enterprises will the wealth subsequently start trickling down to the service industry and lead to any significant reduction in unemployment.

Another fallacy supported by some Nobel Prize economists on the left and subscribed to by this U.S. administration is that government can create productive jobs that are associated with making profits. They insist that the government should be run as a business. The fallacy behind this notion is that business is all about making money but governments are all about spending money. If our past experience is any guide, the government’s ability to create productive jobs outside of labor camps is very limited.

Now, the question is what is the role of government? Is there anything government can do to prevent a recession? The answer is No. There is nothing government can do to prevent recessions. Market forces are too complex and a lot stronger than any government’s ability to control them. The current administration affords dealing with economic crises is perfect example of government inability to influence the market forces.

Stimulus package, quantitative easing, mortgage refinancing, tax credit for new buyers, bailouts have not worked and arguably exacerbated the situation.

But government can do a number of things to limit the impact or depth of a recession.

First, government can and should enforce bankruptcy laws so that failed enterprises can exit the marketplace in an orderly manner.

Second, government can reduce taxes to stimulate investment by big business and increase the public purchasing power so the supply-demand inventory balance can be worked out sooner rather than later.

And third, just as private enterprises cut off fat and get leaner and meaner during the recession, government should use the opportunity to eliminate or reduce some of its bureaucracy and review its regulations to eliminate redundancies and regulations that have a detrimental effect on the economy.

We should be mindful that capitalism is responsible for the most explosive upward wealth surge in history. The best thing the government can do is to let capitalism work.